Richard Li's $2.4bln CSL deal reconnects with past

HKT Trust and HKT

20/12/2013 07:32

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.) By Una Galani HONG KONG, Dec 20 (Reuters Breakingviews) - Richard Li is reconnecting with his past. The Hong Kong tycoon's empire is paying $2.4 billion to buy back CLS, the mobile operator he sold to Australia's Telstra  TLS.AX  in 2001 while deep in debt. That will turn HKT Trust  6823.HK , a listed subsidiary of Li's PPCW 0008.HK  media conglomerate, from the smallest to the largest player in the Hong Kong market by customers. If regulators approve and promised cost-savings come through, investors can count it a happy reunion. HKT is paying roughly the same price it sold for over a decade ago, valuing the mobile operator at 9.2 times CSL's EBITDA of $265 million for the year ending June 2013. Factor in some accounting differences - CSL currently counts handset subsidies for users as an expense, whereas HKT capitalises them as an investment - and the multiple Li is paying falls to 6.1 times. That compares to an average of 4.7 times for peers including larger rivals SmarTone  0315.HK  and Hutchison Telecommunications  0215.HK , based on Thomson Reuters data. The synergies needed to justify that difference aren't too taxing. The implied premium of $371 million, spread over ten years, is equivalent to 14 percent of CSL's revenue last year. By combining networks and sharing transmission towers and retail outlets, HKT should find material cost-savings, given Hong Kong's sky-high property prices. Li's next move should be to convince investors to help recapitalize the business through a rights issue and bring HKT's risk profile back to a reasonable level. Following the acquisition, the company's net debt will rise to 3.7 times its EBITDA from 2.7 times, based on consensus forecasts for 2013. Covering interest payments shouldn't be difficult for a cash generative business, but that ratio is a little too high for comfort. The listed units of HKT Trust rose 4.15 percent to HK$7.02 after the deal was announced, suggesting investors are supportive. That's just as well. Li's effective control over PCCW and HKT means that they don't get a say either way. That's always a risk for a minority shareholder in a tycoon's business empire - but in this case Li's corporate engineering should leave investors better off. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS: www.breakingviews.com/TOPNewsSubscription ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> CONTEXT NEWS - Telecom operator HKT agreed to buy Telstra's Hong Kong mobile phone business CSL in an all-cash deal for HK$18.9 billion ($2.4 billion) on Dec. 20. - Australia's biggest phone company will sell its 76.4 percent stake to HKT, which is a listed arm of PCCW, a media conglomerate controlled by tycoon Richard Li.  - HKT will also buy the remaining stake in CSL held by Hong Kong-based New World Development Ltd., the property developer controlled by the family of local businessman Cheng Yu-tung. - The deal will turn HKT from the smallest into the largest mobile operator by customers in Hong Kong, and reduce the number of players in the market from five to four.  - As part of the effort to secure the necessary regulatory approval, HKT said it would not seek to renew some of its 3G spectrum when it expires in 2016. The deal will expire on June 30, 2014. - HKT said it intends to refinance the deal with longer term financing which could take the form of a long term loan, rights issue, or combination of both.  - Standard Chartered advised HKT on the deal and will provide a $2.5 billion loan facility which may be shared with other banks.  - Telstra bought 60 percent of CSL from PCCW for $1.7 billion in 2001. It bought the remaining 40 percent for $614 million in 2002.  - HKT said that the acquisition will not result in any change to its distribution policy.  - HKT Trust statement: http://www.hkexnews.hk/listedco/listconews/sehk/2013/1220/LTN20131220043.pdf - Reuters: Australia's Telstra to sell Hong Kong unit to Li's HKT for $2 bln  ID:nL3N0JY435  - For previous columns by the author, Reuters customers can click on  GALANI/  (Editing by John Foley and Katrina Hamlin) ((una.galani@thomsonreuters.com))     ((Reuters messaging: una.galani.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS HONG KONG MOBILE